The Beginning of the End for Shale Gas?

The new surge of shale gas drilling depends on two factors. The first is horizontal drilling and the second is hydraulic fracturing. I believe we are seeing the early signs of the demise in hydraulic fracturing.

Hydraulic fracturing requires hundreds of thousands of gallons of water mixed with dangerous chemicals to be pumped into the well under extreme pressure. The chemicals remove the cohesion of the rock and the water pressure expands the cracks. Materials in the solution, the equivalent of large grains of sand, enter the cracks under pressure and prevent the cracks from closing when the frack water is removed. This allows a passage way for the gas to escape the formation and flow up the well bore.

The problem is the billions of gallons of frack water used when hundreds to thousands of wells are drilled in a formation like the Marcellus Shale. That formation covers several highly populated states that depend on existing groundwater for drinking water.

Not all the water used for fracking is recovered from the wells. Some frack solution can find a particularly porous section of the formation and travel for miles underground. Residents around shale gas fields complain violently about the drop in water quality once fracking begins. There are numerous videos online where residents can physically light the water coming out of the tap and film it burning from the gas contamination. This comes from the fracking expanding cracks well away from the well bore and allowing gas to migrate underground and contaminate drinking water.

Secondly there are thousands of "reported" cases of illness from drinking water becoming polluted with the carcinogenic chemicals in the fracking solution. I say reported because this is a contentious issue. Residents seldom see any financial benefit from drilling in their area and are quick to blame any illness, real or imagined, on the drilling companies.

I am sure many cases are from people hoping to get a settlement BUT I am sure there are hundreds if not thousands who are really sick from drinking the polluted ground water. Many won't know it for years to come but I believe we are seeing the leading edge of this problem.

State and local governments are gearing up to fight this problem and there are hundreds of cases in the courts. Now the Federal government is getting back into the fight. The rules on groundwater pollution were eased back in 2005 and exempted from the Safe Drinking Water Act. This was to allow the extensive use of fracking in more densely populated areas.

Prior to the last decade the fracking normally took place deep underground in a vertical well in remote country acreage. When horizontal drilling became such a hot item as a way to access shale gas it opened up monster fields that ran under not only countryside but large metropolitan cities. The Barnett Shale was the first major shale development and it runs right under Dallas and Fort Worth Texas and the home for well over ten million people.

At the same time the gas drillers and service companies like Schlumberger began improving their fracking techniques to take advantage of the horizontal shale formations. Now instead of 50-100 feet of fracking that you would see in a vertical well there may be many thousands of feet of fracking in a horizontal well. This meant you needed a huge amount of fracking solution and much higher pressures. Each service company experimented with dozens of different mixtures and closely guarded the components of their mixture.

Fast forward to today and more than 25,000 wells have been drilled in shale formations and we are just starting to see the results in the form of polluted groundwater and various illnesses afflicting residents.

Pennsylvania has already halted drilling several times and is involved in a comprehensive long-term study of the results of hydraulic fracking in shale. The initial data is not promising however, Pennsylvania has already reaped a $3 billion windfall from drilling activity in the Marcellus Shale. They will likely put off their detrimental findings until the bulk of their lands have been drilled.

New York, another Marcellus beneficiary, has not approved gas drilling in areas where the groundwater is used for drinking water. This is starting to be the pattern wherever shale drilling is moving.

The Federal government is moving to study the problem and lawmakers are likely going to put fracking back under the Safe Drinking Water Act. This will make permitting a much tougher task and link together all the shale areas not just those in Pennsylvania or New York. By monitoring all the shale areas they can determine patterns earlier in the process.

The current fracking process and its side effects has generated so much controversy that two documentaries have been produced. One film is called "Haynesville" and the impact of shale gas drilling on Louisiana and another called "GasLand" specifically about the effects of fracking on groundwater. These films will go a long way towards shifting public perception and produce new regulations regarding the procedure.

Matt Simmons said the effects of putting current fracking practices back under the purview of the Safe Drinking Water Act would be profound. "It is going to be over very quickly. I think the EPA will quickly rule that frack water is carcinogenic and everyone in the industry says when that happens, it is over." That will be the end of shale gas drilling. Without the fracking the volumes of gas produced will not justify the cost of the well.

The issue has become so contentious that shareholders are filing proposals to require additional disclosure on the risks to the public companies. Twelve companies have seen proposals filed and six went to a shareholder vote. They received between 21-42% of shareholder votes. As new horror stories of frac job results nit the wires the shareholder votes will increase. What is the penalty to a company that pollutes the drinking water for a town of a million people? It could be life threatening to the company.

The groundwater problem is not the only problem. When the chemically treated water is removed from the well there is no place to dump it. For a while they were taking it to sewage treatment plants but that quickly found out that treatment plants could not adequately purify the water before dumping it back into a lake or river. A sewage plant is geared to treat biological waste that can be broken down with oxygen and microbes. They are not setup to treat a high level of dissolved carcinogenic solids. These solids were unknowingly being passed downstream. In most locales this process has been halted but not before the chemicals in the downstream water were raised by several hundred percent in some cases.

I believe there are some huge liability lawsuits in our future. These could be in the tens of billions of dollars and crush a company that drilled the wells or performed the fracturing. While these cases could take years to come to trial it may only be a matter of months before there are halts to hydraulic fracturing in many counties if not entire states. This would be a major blow to the gas drilling community as well as to future production projections of gas. The price of gas will rocket higher once lawmakers begin to pass laws assigning liability and governing the process.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.